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PCG’s Simon McVicker warns the Government to tread carefully with its new proposals on the taxation of controlling persons.

Introduction

On 23rd May HMRC published a consultation which has the potential to dramatically affect the way companies and public sector bodies engage senior level freelancers, contractors and interim staff. Entitled ‘The Taxation of Controlling Persons’, the consultation is essentially a proposal by the Government to force all those who are deemed to  be such ‘controlling persons’ in any organisation, public or private sector, to be on the payroll.
 
Alongside the consultation, the Government is introducing interim measures for public sector workers which will be effective from September. As well as ‘controlling persons’, these measures will affect any public sector worker earning an equivalent salary of £58,200 p/a or above. 

Why the Proposals are being Introduced

Before examining the proposals in detail, it’s worth noting why the Government is taking these steps. The initiatives are widely thought to be a response to the case of Ed Lester, former Chief Executive of the Student Loans Company, who was engaged via his own limited company and was reported to being making considerable tax savings as a result.  The media storm that ensued provoked the Treasury into undertaking a review of all ‘off payroll’ public sector appointments and ultimately led to the proposals put forward in the consultation document.  It is absolutely right the Government should take steps to prevent cases such as that of Ed Lester from being repeated, but it is also vitally important the Government does not hinder the UK’s vibrant flexible workforce.

Key Questions

The consultation raises three key questions on the measures proposed by the Government.

1. Firstly, who exactly are the ‘controlling persons’ to which the document refers?
2. Secondly, what commercial effect will these measures have, in relation to both freelancers themselves and their engagers?
3. Thirdly, what will be done to ensure these measures do not harm legitimate freelance businesses operating within either the public or private sector?

Definition of "Controlling Person"

The first question is crucial as the Government risks tarring the entire freelance community with the same brush unless it provides a clear and precise definition of the ‘controlling persons’ to which it refers. Both the public and private sectors rely on freelancers to provide specialist expertise when and where it is needed, often in positions that carry responsibility. In its current form, the solution it has proposed does not do enough to accurately define the roles which it does not consider appropriate for ‘off-payroll’ engagement.

From the outset, the Government has been careful to deny that this review and the ensuing changes in legislation constitute an attack on freelancers. They have also repeatedly endorsed this way of working and stated that freelancing is crucial to the growth of the UK economy. With that in mind, any legislation that is put in place needs to define who these ‘controlling persons’ are, without ambiguity.  The Government must also clearly set out which roles should be considered outside the scope of these regulations.

Commercial Effects

The Treasury has gone on record to say that there will be no commercial effect stemming from its proposals. At this stage, it is difficult to find any evidence to support this claim. Removing the use of freelancers as an option from certain roles will clearly have a commercial effect and the Government needs to outline exactly how severe these effects will be, both to the freelancers themselves and the departments, organisations and businesses that engage them.

Unintended Consequences

Lastly, the proposals as they stand do not do enough to mitigate the possible harmful effects on legitimate freelancers and their ability to work. If it is to be considered to be fit for purpose, this legislation should guard against abuse of the system whilst ensuring legitimate freelancers are not mistakenly caught in its scope. In its current guise, the Government proposals are at risk of doing neither but adding to the confusion, grey areas and red tape caused by the introduction of IR35 in 1999.

Next Steps

Broadly speaking there appears to be a political consensus on the issue of off-payroll controlling persons, with all the major political parties being quick to condemn what they believe to be unacceptable tax avoidance and disguised employment. Coupled with the current political and financial climate and a keen media interest in the situation, this means it is unlikely the proposals will be dropped. However PCG believes that unless the three questions raised above are answered in clear terms during the consultation process and the proposals revised accordingly, then there is a real danger that any legislation will place both the public and private sector in an ‘employment stranglehold’ when it comes to their flexible workforce. This would occur at the worst possible economic time, since it is our firm belief that freelance businesses can help create the vital economic growth the country so badly needs. 

PCG is consulting with a range of independent tax experts as well as other business groups on this issue.  We want to present to Government a rounded view of how we believe these proposals, unless very carefully handled, could affect UK businesses.  We would be very interested to hear your views too so please do leave your comments in the space provided below.